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Do you ever feel like you’re out of cash before your paycheck even clears the bank? If so, you’re not alone.
A 2017 CareerBuilder survey found that over three-quarters of Americans are living paycheck to paycheck— but that money crunch affects their ability to build a bright future.(1) And the cost of living is a top reason people don’t save more for retirement, according to Ramsey Solutions research.
One of the biggest costs holding people back? Car payments. Americans owe more than $1.22 trillion in car loans alone.(2) People, that’s a problem!
What would happen to your retirement outlook if you got rid of your car payment? Is that goal even possible? Absolutely! Let me show you how.
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Americans Spend More and Pay Longer for New Cars
Each quarter, Experian Automotive releases data on the latest car financing trends. Their 2017 Quarter 4 report shows how much car loans are crippling people:
- Nearly 9 in 10 new cars are purchased with borrowed money.
- The average new car loan totals $31,099 with monthly payments of $515 at 5.11% interest.
- The average new car loan term is 69 months—that’s more than five and a half years!(3)
Now, take a second and let that sink in. If you’re the average car buyer, you’ll spend the five years to pay more than $34,000 for a car will be worth maybe $12,000 at the end of that time. That’s not okay!
Chances are, you won’t be as happy with your car as you were when you started paying for it. So, you go out and buy another new car, and the process starts all over again. If this sounds like your situation, you’re spinning your wheels without ever gaining traction.
How Your Car Payment Destroys Your Retirement
This never-ending cycle means you’ve permanently dedicated a chunk of your income to car payments—and you won’t have anything to show for it but a car that’s losing value every year you have it. That hard-earned money could be working for you if you’d invest it instead.
Simply put, if you didn’t have a car payment and instead worked with a pro to invest that $500 a month in your 401(k) or Roth IRA, you could retire with more than $1 million after 30 years. That would certainly go a long way toward closing the retirement savings gap that grows by $3 trillion a year.(4)
The good news is, you can stop the car-buying cycle and start saving for retirement. It will take some sacrifice and a lot of discipline, but it’s worth it all to change your future. Here’s how.
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Eliminate Your Car Payment Forever
Let’s say the paid-for car you’re driving now is worth $12,000. Instead of taking out another loan to buy a new car, stick with this car a little longer. In the meantime, save your $500 car payment in a good money market account specifically to save for a car replacement—and in two years, you’ll have $12,000 cash plus your trade-in to buy a nicer, new-to-you car without owing the bank a single penny.
Once you’ve learned how awesome saving money can be, you won’t mind driving your current car a little longer while your car-replacement fund grows. Keep adding $500 to your car-replacement account every month for another three years, and—in less time than it would have taken you to pay off a new car loan—you could have nearly $31,000 plus your trade-in to buy a new car.
Of course, you don’t have to use all of that to find another great used car, so you leave a sizeable balance in your car-replacement fund to keep growing until your next car purchase. At this point, you stop contributing to your car-replacement fund and put that $500 toward retirement instead! Now, that’s something worth working toward!
Related: Imagine how much faster your nest egg could grow with an extra $700 or more. You could find money like that simply by having an independent insurance agent check your insurance rates.
Can This Plan Work for You?
Getting rid of car payments isn’t a fairytale. It just takes planning and patience. And isn’t your future worth it? No car, no matter how fancy, can give you peace of mind in retirement. That kind of security comes from having a plan and following through with it. Looking to put your retirement vision into a practical plan? We can connect you with an investing professional who’s committed to educating and empowering you to reach your retirement goals. Find a SmartVestor Pro in your area today!
About Chris Hogan
Chris Hogan is the #1 national best-selling author of Retire Inspired: It’s Not an Age; It’s a Financial Number and host of the Retire Inspired Podcast. A popular and dynamic speaker on the topics of personal finance, retirement and leadership, Hogan helps people across the country develop successful strategies to manage their money in both their personal lives and businesses. You can follow Hogan on Twitter and Instagram at @ChrisHogan360 and online at chrishogan360.com or facebook.com/chrishogan360.